Wowio, LLC was formed on June 29, 2009 under
the laws of Texas (“Wowio Texas”). On July 16, 2010, the Company converted to a C-corporation under the laws of Texas.
Wowio, Inc. and its wholly owned subsidiary Carthay Circle Publishing (collectively, the “Company”, “we”,
“our”, “Wowio”) is an emerging company in the creation, production, distribution and monetization of digital
entertainment. We specialize in creating custom brand strategies to develop, produce, distribute and promote entertainment properties
across multiple product lines and distribution channels, including our own websites, traditional media, social media and emerging
technologies.
The Company operates in a rapidly changing
technological and digital entertainment market and its activities are subject to significant risks and uncertainties, including
failing to secure additional funding to further exploit the Company’s current technology and digital entertainment properties.
This summary of significant accounting policies
is presented to assist the reader in understanding and evaluating the Company’s consolidated financial statements. The consolidated
financial statements and notes are the representations of the Company’s management, who are responsible for their integrity
and objectivity. The accounting policies conform to accounting principles generally accepted in the United States of America (“U.S.
GAAP”) and have been consistently applied in the preparation of the consolidated financial statements.
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
“Revenue from Contracts
with Customers (Topic 606)”
(“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition
to replace numerous, industry specific requirements and converges areas under this topic with those of the International Financial
Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer
of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature,
amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization
and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing
estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. Entities can transition
to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. On July 9, 2015, the FASB
approved amendments deferring the effective date by one year to December 15, 2017 for annual reporting periods beginning after
that date and permitting early adoption of the standard, but not before the original effective date or for reporting periods beginning
after December 15, 2016. The Company has not yet selected a transition method and is currently assessing the impact the
In August 2014, the FASB issued ASU No. 2014-15,
“Presentation
of Financial Statements - Going Concern”
. The amendments in this update provide guidance in U.S. GAAP about management’s
responsibilities to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern
and to provide related footnote disclosures. The main provision of the amendments are for an entity’s management, in connection
with the preparation of financial statements, to evaluate whether there are conditions or events, considered in the aggregate,
that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that
the financial statements are issued. Management’s evaluation should be based on relevant conditions and events that are known
or reasonably knowable at the date the consolidated financial statements are issued. When management identifies conditions or events
that raise substantial doubt about an entity’s ability to continue as a going concern, the entity should disclose information
that enables users of the consolidated financial statements to understand all of the following: (1) principal conditions or events
that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s
plans); (2) management’s evaluation of the significance of those conditions or events in relation to the entity’s ability
to meet its obligations; and (3) management’s plans that alleviated substantial doubt about the entity’s ability to
continue as a going concern or management’s plans that are intended to mitigate the conditions or events that raise substantial
doubt about the entity’s ability to continue as a going concern. The amendments in this update are effective for interim
and annual reporting periods after December 15, 2016 and early application is permitted. The Company is currently assessing this
guidance for future implementation.
In April 2015, the FASB issued Accounting Standard
Update (“ASU”) 2015-03, Simplifying the Presentation of Debt Issuance Costs. This update requires capitalized debt
issuance costs to be classified as a reduction to the carrying value of debt rather than a deferred charge, as is currently required.
This update will be effective for the Company for all annual and interim periods beginning after December 15, 2015 and is required
to be adopted retroactively for all periods presented, and early adoption is permitted. The Company is currently evaluating the
expected impact of this new accounting standard on its consolidated financial statements.
The consolidated financial statements include
the accounts of Wowio, Inc. and its wholly-owned subsidiary Carthay Circle Publishing. All intercompany balances and transactions
have been eliminated in consolidation.
The Company recognizes revenues in accordance
with FASB Accounting Standards Codification (“ASC”) Topic 605, which requires that four basic criteria must be met
before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling
price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (4) will be based on management’s
judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions
for discounts and rebates to customers, estimated returns and allowances, and other adjustments will be provided for in the same
period the related sales are recorded. The Company will defer any revenue for which the product has not been delivered or for which
services have not been rendered or are subject to refund until such time that the Company and the customer jointly determine that
the product has been delivered or services have been rendered or no refund will be required.
For eBook downloads purchased by
the customer directly through the Company’s website, the Company recognizes revenue when the right to download content is
granted. The Company evaluates whether it is appropriate to record the gross amount of product sales and related costs or the net
amount earned. Generally, the Company records such revenues on a net basis due to a general lack of indicators that the Company
is the primary obligor primarily due to the Company’s lack of ability to determine price. Typically for these sales, the
Company’s net revenues consist of a credit card processing fee along with the majority of the advertising fee when there
is an ad sponsor.
Occasionally, the Company sells
download cards to retailers and directly to end customers, which are redeemable on its websites for content downloads over an established
time frame. The Company records proceeds from the initial sale of the card to deferred revenue, which is included in accounts payable
and accrued expenses in the accompanying consolidated balance sheets, and is recognized as revenue over the related download period,
which approximates the usage period.
Visitor demographics and time spent
on a website are the primary drivers behind advertising-based revenue models for internet properties. Website advertising revenue
is primarily recognized on a flat-fee basis based on cost per thousand impressions (“CPM”). The Company earns CPM revenue
from the display of graphical advertisements on its websites. Revenue from flat-fee services is based on a customer’s period
of contractual service and is recognized on a straight-line basis over the term of the contract. Proceeds from such contracts are
deferred and are included in revenue on a pro-rata basis over the term of the related agreements.
The Company owns Patent No. 7,848,951,
issued by the USPTO on December 7, 2010, protecting the insertion of ads into eBooks. The Company intends to pursue patent licensing
arrangements with eBook distribution outlets looking to create new revenue streams for eBook downloads. The Company will also pursue
any violators who infringe on the patent’s claims, ultimately generating license revenues on a per-book or per-ad basis.
Revenue from patent licensing arrangements
is recognized when earned, estimable and realizable. The timing of revenue recognition is dependent on the terms of each license
agreement and on the timing of sales of licensed products. The Company generally recognizes royalty revenue when it is reported
to the Company by its licensees, which is generally one quarter in arrears from the licensees’ sales. For licensing fees
that are not determined by the number of licensed units sold, the Company recognizes license fee revenue on a straight-line basis
over the life of the license.
Revenues are also generated by the
exploitation of WOWIO’s own proprietary content of creative material such as comic books, graphic novels, screenplays, and
other published and non-published content. The WOWIO-owned Spacedog library is available for sale on wowio.com and the Company
retains 90% of all retail sales for that content library.
The Company’s content also
generates revenues from licensing stories/characters/concepts to studios and other producing partners. Licensing deals that may
generate revenue for the Company include film option/acquisition fees, television option/acquisition fees, video game licensing,
content licensing for apps, apparel and merchandise licensing.
A financial instrument which potentially subjects
the Company to concentrations of credit risk is cash. The Company places its cash with financial institutions deemed by management
to be of high credit quality. The Federal Deposit Insurance Corporation (“FDIC”) provides basic deposit coverage with
limits up to $250,000 per owner. At December 31, 2015 and 2014, there were no uninsured amounts.
During the years ended December 31, 2015 and
2014, one customer accounted for approximately 98% and 94% of revenues respectively (see Note 9)
The preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of
revenues and expenses during the reporting periods.
Significant estimates made by management include,
among others, fair value of common stock and preferred stock issued, fair value of beneficial conversion features, fair value of
derivative liabilities, recoverability of long-living assets and realization of deferred tax assets. The Company bases its estimates
on historical experience, knowledge of current conditions and belief of what could occur in the future considering available information.
The Company reviews its estimates on an on-going basis. The actual results experienced by the Company may differ materially and
adversely from its estimates. To the extent there are material differences between the estimates and actual results, future results
of operations will be affected.
Fair value measurements are determined based
on the assumptions that market participants would use in pricing an asset or liability. U.S. GAAP establishes a hierarchy for inputs
used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring
that the most observable inputs be used when available. The established fair value hierarchy prioritizes the use of inputs used
in valuation methodologies into the following three levels:
Level 1: Quoted prices (unadjusted)
for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of
fair value and must be used to measure fair value whenever available.
Level 2: Significant other observable
inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable
inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing
an asset or liability. For example, level 3 inputs would relate to forecasts of future earnings and cash flows used in a discounted
future cash flows method.
The Company’s financial instruments consist
of cash, accounts payable, accrued expenses, notes payable, convertible notes payable and related party notes payable. The Company
cannot determine the estimated fair value of its convertible notes payable as instruments similar to the convertible notes payable
could not be found. Other than for convertible notes payable, the carrying value for all such instruments approximates fair value
due to the short-term nature of the instruments.
The Company uses Level 3 of the fair value
hierarchy to measure the fair value of the derivative liabilities and revalues its derivative convertible notes, preferred stock
and warrant liabilities at every reporting period and recognizes gains or losses in the statements of operations that are attributable
to the change in the fair value of the derivative convertible notes, preferred stock and warrant liabilities.
In certain instances, the Company has entered
into convertible notes that provide for an effective or actual rate of conversion that is below market value, and the embedded
beneficial conversion feature (“BCF”) does not qualify for derivative treatment. In these instances, the Company accounts
for the value of the BCF as a debt discount, which is then amortized to interest expense over the life of the related debt using
the straight-line method, which approximates the effective interest method.
The Company expenses marketing, promotions
and advertising costs as incurred. For the years ended December 31, 2015 and 2014, such costs totaled $1,615 and $96,670, respectively.
Such costs are included in general and administrative expense in the accompanying consolidated statements of operations.
All share-based payments, including grants
of stock to employees, directors and consultants, are recognized in the consolidated financial statements based upon their estimated
fair values.
The Company’s accounting policy for equity
instruments issued to consultants and vendors in exchange for goods and services follows ASC Topic 505. As such, the value of the
applicable stock-based compensation is periodically re-measured and income or expense is recognized during their vesting terms.
The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which
a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s
performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is primarily
recognized over the term of the consulting agreement. In accordance with FASB guidance, an asset acquired in exchange for the issuance
of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor’s
balance sheet once the equity instrument is granted for accounting purposes.
The Company accounts for income taxes under
the provision of ASC 740. As of December 31, 2015 and 2014, there were no unrecognized tax benefits included in the consolidated
balance sheets that would, if recognized, affect the effective tax rate. The Company’s practice is to recognize interest
and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties on its
consolidated balance sheets as of December 31, 2015 and 2014 and has not recognized interest and/or penalties in the consolidated
statements of operations for the years ended December 31, 2015 and 2014. The Company is subject to taxation in the United States,
Texas and California.
Basic net loss per common share is computed
by dividing net loss attributable to common stockholders for the period by the weighted-average number of common shares outstanding
during the period. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders for the
period by the weighted-average number of common and common equivalent shares, such as warrants outstanding during the period. Common
stock equivalents from warrants, preferred stock and convertible notes payable were 12,003,953,065 and 94,497 for the years ended
December 31, 2015 and 2014, respectively, and are excluded from the calculation of diluted net loss per share for all periods presented
because the effect is anti-dilutive.
The Company evaluates debt instruments, preferred
stock, stock options, stock warrants or other contracts to determine if those contracts or embedded components of those contracts
qualify as derivatives to be separately accounted for under the relevant sections of ASC Topic 815-40,
Derivative Instruments
and Hedging: Contracts in Entity’s Own Equity
. The result of this accounting treatment could be that the fair value of
a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded
as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement
of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked
to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially
classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at
the fair value of the instrument on the reclassification date.
Certain of the Company’s embedded conversion
features on debt, preferred stock and warrants with potentially insufficient authorized shares to settle outstanding contracts
in the future are treated as derivatives for accounting purposes. The Company estimates the fair value of these embedded conversion
features and warrants with potentially insufficient authorized shares to settle outstanding contracts in the future using the Black-Scholes
Merton option pricing model (“Black-Scholes”) (see Note 7). Based on these provisions, the Company has classified all
conversion features and warrants as derivative liabilities at December 31, 2015 and 2014.
The accompanying consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company’s revenues since inception have been nominal. Additionally, since inception, the
Company has had recurring operating losses and negative operating cash flows and at December 31, 2015 and 2014, had negative working
capital. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The Company’s continuation as a going
concern is dependent on its ability to obtain additional financing to fund operations, implement its business model, and ultimately,
to attain profitable operations. The Company will need to secure additional funds through various means, including equity and debt
financing, funding from a licensing arrangement or any similar financing. There can be no assurance that the Company will be able
to obtain additional debt or equity financing, if and when needed, on terms acceptable to the Company, or at all. Any additional
equity or debt financing may involve substantial dilution to the Company’s stockholders, restrictive covenants or high interest
costs. The Company’s long-term liquidity also depends upon its ability to generate revenues from the sale of its products
and achieve profitability. The failure to achieve these goals could have a material adverse effect on the execution of the Company’s
business plan, operating results and financial condition. The Company intends to raise additional financing.
The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification
of liabilities that might be necessary should the Company be unable to continue as a going concern.
On October 13, 2010, the Company entered into
a secured note receivable with Top Cow Productions (“TCP”) for $175,000. Terms of the note required interest at the
rate of 10% per annum and equal monthly installments of principal over twelve months beginning in May 2011 through April 2012.
The note was secured by certain assets of TCP and individually by two owners of TCP. As of December 31, 2015 and 2014, the balance
of the note receivable was $0 and $195,678, respectively, including accrued interest receivable of approximately $0 and $62,678,
respectively.
The Company has capitalized the costs of bringing
this production to market in accordance with ASC 926, “Entertainment – Films.” Due to lack of development of
the feature film script, the Company recorded an impairment loss on intangible assets of $195,678 as the carrying value of the
intangible assets was determined to be unrecoverable as of December 31, 2015.
On June 29, 2009, Wowio Texas entered into
a securities purchase agreement (the “Agreement”) with Platinum Studios, Inc. (“Platinum”) pursuant to
which Platinum agreed to transfer to the Company, all of the membership interests of Wowio, LLC (a Pennsylvania Limited Liability
Company and wholly owned subsidiary of Platinum) (“Wowio Penn”) in exchange for total consideration of $3,150,000,
comprised of assumed liabilities of approximately $1,636,000 (of which $82,853 was still outstanding as of December 31, 2015 and
December 31, 2014), including $794,518 of amounts owed to Brian Altounian (which was fully paid or settled as of December 31, 2014)
the Company’s former CEO, and an additional $1,514,000 to be paid via royalty at a rate of 20% of gross revenues generated
from acquired assets. Subsequent to the $1,514,000 being satisfied, such royalty rate shall reduce to 10% of net revenues generated
in perpetuity.
On May 5, 2010, Wowio Texas entered into an
asset purchase agreement with Platinum pursuant to which Platinum agreed to transfer to the Company, all of the ownership interests
in the assets, including related websites, of Drunk Duck (the “Duck”) in exchange for total consideration of $1,000,000
in cash of which $350,000 of such amount had been previously paid, $150,000 was due from July 2010 – October 2010 and $500,000
is to be paid in quarterly installments equal to a minimum of 10% of net revenue derived from the purchased assets. As a security
interest, Platinum retained a 10% ownership position in the assets, which is being reduced proportionately, as payments are made
to Platinum. As of December 31, 2015, Platinum retained ownership of 6.5% of the assets, as a result of amounts owed to Platinum
under the purchase agreement. The $150,000 initially due from July 2010 to October 2010 remains outstanding as of December 31,
2015 and 2014.
Effective May 15, 2010, Wowio Texas entered
into a securities purchase agreement with Spacedog Entertainment, Inc. (a New York corporation) (“SDE”) pursuant to
which SDE agreed to transfer to Wowio, Inc., all of the common stock of SDE in exchange for total consideration of $1,650,000,
comprised of $107,000 in cash, 1,187 shares of common stock (valued at $1,543,000 - based on the estimated fair value on the measurement
date) and an additional $1,000,000 to be paid via royalty at a rate of 100% of gross revenues generated from SDE assets. Subsequent
to the $1,000,000 being satisfied, the seller shall no longer be entitled to receive any further royalties. In accordance with
the agreement, the Company neither assumed nor became responsible, in any way, for any liabilities, debts or other obligations
of SDE.
In connection with a credit agreement (“Revolving
Loan”) with TCA Global Credit Master Fund, LP (“TCA”), the Company issued a series of three warrants to TCA (“TCA
Warrants”), each to purchase 184,157 shares of common stock, or 1% of the issued and outstanding common stock of the Company
at September 21, 2012. Each warrant had an exercise price of $0.01 per share. Each of the TCA Warrants was immediately exercisable
upon issuance and had terms of six months, nine months and twelve months, respectively. Each of the TCA Warrants had a mandatory
redemption clause, which obligated the Company to redeem the warrant in full by payment of $30,000 each if not exercised by the
respective redemption dates through September 21, 2013. The Company recorded $90,000 in accounts payable and accrued expenses with
a corresponding reduction to additional paid-in capital related to TCA Warrants in connection with its mandatory redemption clause,
with $60,000 still outstanding as of December 31, 2015 and 2014.
The Revolving Loan contains various covenants,
certain of which the Company was not in compliance with at December 31, 2015. The amount of principal due as of December 31, 2015
and 2014 was $50,000, and $60,000 in warrant liabilities. Accrued interest and fees related to the Revolving Loan of $27,797 and
$18,797 is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets as of December 31,
2015 and 2014, respectively.
During 2011, the Company issued an aggregate
of $157,355 of notes payable to employees in lieu of compensation due. The notes matured in December 2012, are now due on demand
and accrue interest at a rate of 2.25% per year. The amount of principal due at December 31, 2015 and 2014 was $100,902. In August
2014, $11,668 in principal and $655 in interest was satisfied by a third party for shares of the Company's common stock (See Note
8). Accrued interest of $18,257 and $7,458 is included in accounts payable and accrued expenses in the accompanying consolidated
balance sheets as of December 31, 2015 and 2014, respectively.
On January 17, 2012 and June 15, 2012, the
Company issued $10,000 and $1,000, respectively, of notes payable to one employee. The notes matured on June 15, 2013 and accrue
interest of 8% per year. In August 2014, the outstanding principal of $10,000 and interest of $1,961 was satisfied by a third party
for shares of the Company's common stock (See Note 8). There were no amounts due at December 31, 2014.
Notes Payable
Notes payable consist of the following at:
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
Secured note payable to an individual, 15
% interest rate, entered into in December 2011, due on demand, as amended
|
|
|
15,000
|
|
|
|
100,000
|
|
|
Secured note payable to an individual, 12% interest rate, entered into in September 2013, due on demand with default interest of 17%, 50% satisfied by a third party in 2014
|
|
|
25,000
|
|
|
|
25,000
|
|
|
Note payable to an individual, 12% interest rate, entered into in November 2013, due on demand with default interest of 17%, 50% satisfied by a third party in 2014
|
|
|
50,000
|
|
|
|
50,000
|
|
|
Note payable to an individual, flat interest of $20,000, entered into in April 2014, due on demand
|
|
|
450,000
|
|
|
|
450,000
|
|
|
Note payable to an individual, non-interest bearing, entered into in August 2014, was paid off in January 2016
|
|
|
35,000
|
|
|
|
35,000
|
|
|
Notes payable to various individuals, 12% interest rate, entered into from August 2013 to January 2014, due on demand
|
|
|
5,000
|
|
|
|
16,000
|
|
|
Secured note payable to an individual, 12% interest rate, entered into in January 2014, was paid off in January 2016
|
|
|
260,000
|
|
|
|
299,366
|
|
|
Note payable to an individual, 8% interest rate, entered into in November 2014, due on demand
|
|
|
20,000
|
|
|
|
20,000
|
|
|
Note payable to an individual, 8% interest rate, entered into in October 2014, was paid off in January 2016, net of discount of $0 and $6,667, respectively
|
|
|
5,000
|
|
|
|
3,333
|
|
|
Note payable to an individual, flat interest of $9,000, entered into in December 2014, due on demand, net of discount of $0 and $7,830, respectively
|
|
|
-
|
|
|
|
17,400
|
|
|
|
|
$
|
865,000
|
|
|
$
|
1,016,099
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
(865,000
|
)
|
|
|
(1,016,099
|
)
|
On December 20, 2011, the Company issued a
10% senior secured promissory note (“Secured Note”) to an individual in the amount of $100,000 and was initially due
in December 2012. The Secured Note is secured by all of the Company’s acquired intangible assets. On February 14, 2013, the
Company entered into a waiver and amendment #1 agreement to the Secured Note, extending the maturity date from December 20, 2012
to June 20, 2013. In February 2014, the Company entered into a waiver and amendment #2 to this Secured Note extending the maturity
date from June 20, 2013 to June 20, 2015. In February 2015, $25,000 of the note was transferred to a third party as a convertible
note. In March 2015, additional $25,000 of the note was assigned to a third party as a convertible note. In April 2015, $35,000
of the note was transferred to a third party as a convertible note. See note 7 for discussion of loss on debt extinguishment.
In January 2014, the Company issued a secured
promissory note to an individual in the amount of $300,000. The note bears interest at 12% annually, with interest of $60,647 as
of December 31, 2015, due on demand. During year ended December 31, 2015, $20,000 of the note was assigned to a third party as
convertible notes. See note 7 for discussion of loss an debt extinguishment.
In connection with this note, the Company issued
the holder of the note a warrant to purchase 25,000 shares of the Company’s Series A Preferred Stock at a price of $1.50
per share with an expiration date of January 2017. The relative fair value of the warrant of $15,190 was treated as a discount
and was amortized over the life of the note. During the year ended December 31, 2015 and 2014, the Company amortized $634 and $14,556
respectively to interest expense in the accompanying consolidated statement of operations.
In April 2014, the Company issued a promissory
note to an individual in the amount of $450,000. The note bears flat interest of $20,000 and was due in July 2014. In October 2014,
the Company issued 1,538 shares of common stock to extend the due date of this promissory note, along with two other notes to this
individual, to January 2015 and March 2015. The estimated fair value of the 1,538 shares of common stock of $170,000 was computed
based on stock price of $111 per share in accordance with the terms of the agreement and was treated as a loss on debt extinguishment
in accordance with relevant accounting guidance.
In June 2014, the Company amended certain notes
payable to allow the note holders to convert any unpaid principal and accrued interest into shares of the Company’s common
stock at a conversion price of $0.50 per share, which was above the current market price of $0.01 per share. Accordingly, the Company
recorded a beneficial conversion feature of $200,031 to be amortized over the life of the related notes payable. As of December
31, 2015 and 2014, an aggregate of $0 and $212,000 in principal and $0 and $19,539 in accrued interest were converted into 0 and
356 shares of the Company’s common stock. The Company charged $0 and $200,031 to interest expense during the year ended December
31, 2015 and 2014 in the accompanying consolidated statement of operations related to the amortization of the beneficial conversion
feature.
In October 2014, the Company issued a secured
promissory note to an individual in the amount of $10,000. The note bears interest at 8% annually, with interest of $745 as of
December 31, 2015, due on demand. During year ended December 31, 2015, $5,000 of the note was assigned to a third party as convertible
notes.
During the year ended December 31, 2015 and
2014, the Company recorded the relative fair value of warrants and beneficial conversion features of $0 and $48,990, respectively,
as debt discount to be amortized over the life of the respective debt instrument. During the year ended December 31, 2015 and 2014,
the Company amortized $15,131 and $33,859, respectively, of debt discount to interest expense related to the Company’s notes
payable in the accompanying consolidated statements of operations.
Accrued interest related to notes payable of
$153,786 and $101,537 is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets as of
December 31, 2015 and 2014, respectively.
Convertible Notes Payable
Convertible notes payable consist of the following
at:
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
Secured convertible note, 8% interest rate, entered into on June 9, 2014, fully converted into common stock
|
|
|
—
|
|
|
|
—
|
|
|
Secured convertible note, 10% interest rate, entered into on August 1, 2014, due on demand, net of debt discount of $0 and 32,083, respectively
|
|
|
—
|
|
|
|
22,917
|
|
|
Secured convertible note, 10% interest rate, entered into on August 26, 2014, due on demand, 20% default interest rate, net of debt discount of $0 and $37,102, respectively
|
|
|
57,973
|
|
|
|
17,898
|
|
|
Secured convertible note, 12% interest rate, entered into on August 29, 2014, due on demand, 24% default interest rate, net of debt discount of $0 and 23,333, respectively
|
|
|
26,728
|
|
|
|
11,667
|
|
|
Convertible notes, interest rates of 8% to 12%, entered into in September 2014, due on demand
|
|
|
31,500
|
|
|
|
31,500
|
|
|
Secured convertible note, 8% interest rate, entered into on November 18, 2014, due on demand, 20% default interest rate
|
|
|
3,135
|
|
|
|
20,500
|
|
|
Secured convertible note, 8% interest rate, entered into on November 18, 2014, due on demand, 24% default interest rate, net of debt discount of $0 and $18,812, respectively
|
|
|
23,650
|
|
|
|
2,688
|
|
|
Secured convertible note, entered into on November 5, 2014, fully converted into common stock, net of debt discount of $5,812 as of December 31, 2014
|
|
|
—
|
|
|
|
1,738
|
|
|
Secured convertible note, 8% interest rate, entered into on December 15, 2014, due on demand, 24% default interest rate, net of debt discount of $0 and $38,333, respectively
|
|
|
37,758
|
|
|
|
11,667
|
|
|
Secured convertible note, 8% interest rate, entered into on December 15, 2014, due on demand, 24% default interest rate
|
|
|
44,000
|
|
|
|
40,000
|
|
|
Secured convertible note, 12% interest rate, entered into on January 7, 2015, due on demand, 22% default interest rate, net of debt discount of $0
|
|
|
69,908
|
|
|
|
—
|
|
|
Secured convertible note, 0% interest rate, entered into on February 19, 2015, due on demand, net of debt discount of $0
|
|
|
2,500
|
|
|
|
—
|
|
|
Secured convertible note, 8% interest rate, entered into on February 4, 2015, due on demand, net of debt discount of $8,134
|
|
|
8,507
|
|
|
|
—
|
|
|
Secured convertible note, 12% interest rate, entered into on February 20, 2015, due on demand, net of debt discount of $0
|
|
|
45,750
|
|
|
|
—
|
|
|
Secured convertible note, 12% interest rate, entered into on March 16, 2015, due on demand, net of debt discount of $0
|
|
|
45,750
|
|
|
|
—
|
|
|
Secured convertible note, 12% interest rate, entered into on March 16, 2015, due on demand
|
|
|
376
|
|
|
|
—
|
|
|
Secured convertible note, 10% interest rate, entered into on April 20, 2015, due on demand
|
|
|
43,591
|
|
|
|
—
|
|
|
Secured convertible note, 12% interest rate, entered into on April 20, 2015, due on demand, net of debt discount of $0
|
|
|
70,500
|
|
|
|
—
|
|
|
Secured convertible note, 12% interest rate, entered into on May 1, 2015, due on demand, net of debt discount of $2,778
|
|
|
23,722
|
|
|
|
—
|
|
|
Secured convertible note, 8% interest rate, entered into on May 16, 2015, due May 16, 2016, net of debt discount of $1,563
|
|
|
4,938
|
|
|
|
—
|
|
|
|
|
$
|
540,286
|
|
|
$
|
160,575
|
|
|
Less current portion
|
|
|
(540,286
|
)
|
|
|
(160,575
|
)
|
|
|
|
$
|
|
|
|
$
|
|
|
In January 2014, holders of certain convertible
notes payable converted $220,000 in principal and $35,931 of accrued and unpaid interest into 985 shares of the Company’s
common stock.
In April 2014, the holder of the remaining
convertible notes payable converted $200,000 in principal and $41,943 of accrued and unpaid interest into 1,390 shares of the Company’s
common stock. Subsequently, in August 2014, the note holder reversed his decision and chose to receive his accrued and unpaid interest
in cash. As a result, the Company issued the note holder a note payable for approximately $42,000 and cancelled the 236 common
shares previously issued (See Note 8).
During the year ended December 31, 2015, various
holders of convertible notes payable converted $257,691 in principal and $7,321 of accrued and unpaid interest into 484,634,780
shares of the Company’s common stock.
In June 2014, the Company entered into a convertible
promissory note in the principal amount of $37,500 that bore interest at 8%, was due March 2015, which allowed the lender to convert
the unpaid principal and accrued interest into shares of the Company’s common stock at a variable conversion price (as defined)
after 180 days. In December 2014, note holder converted $12,935 in principal into 2,098 shares of the Company’s common stock.
In January 2015, note holder converted remaining balance of $24,565 in principal and $500 in accrued interest into 8,346 shares
of the Company’s common stock.
During the year ended December 31, 2015 and
2014, the Company entered into an aggregate of approximately $327,500 and $409,594, respectively (net cash of $156,500 and $265,750,
respectively) in convertible promissory notes bearing interest at rates between 8% and 12%, due on various dates, net of fees approximating
$20,500. The convertible notes allow the lender to convert the unpaid principal and accrued interest into shares of the Company’s
common stock at a variable conversion price (as defined). Certain of these convertible notes allow the lender to determine the
timing of conversion, and as such the embedded conversion feature resulted in a derivative liability and a corresponding debt discount
in the amount of $217,500 and $251,750 to be recorded (See Note 7). The Company is amortizing the debt discount over the life of
the corresponding convertible promissory notes. The amortization of the debt discount for these derivative instruments was $214,284
and $71,710 for the year ended December 31, 2015 and 2014. In connection with the conversion of debt that were treated as derivative
instruments, the Company reclassified $501,000 and $74,000 to additional paid-in capital during the year ended December 31, 2015
and 2014.
During the year ended December 31, 2015, the
Company was in default on certain convertible notes. Pursuant to the default provisions contained in the respective note agreements,
the Company recorded an aggregate of additional interest expense of $130,060, which was added to the outstanding principal balance.
Accrued interest related to convertible notes
payable of $62,985 and $8,768 is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets
as of December 31, 2015 and 2014, respectively.
As of December 31, 2015, the Revolving Loan
and a number of the outstanding related party notes payable, notes payable and convertible notes payable balances are delinquent.
The Company is in negotiations with the note holders to amend the terms of the notes.
NOTE 7 - DERIVATIVE LIABILITIES
The Company applies the accounting standard
that provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s
own stock. The standard applies to any freestanding financial instrument or embedded features that have the characteristics of
a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.
From time to time, the Company has issued notes
and preferred stock with embedded conversion features and warrants to purchase common stock. Certain of the embedded conversion
features and warrants contain price protection or anti-dilution features that result in these instruments being treated as derivatives.
In addition, potentially in the future, the Company may have an insufficient number of available shares of common stock to settle
outstanding contracts. Accordingly, the Company has estimated the fair value of these embedded conversion features, warrants, and
derivatives related to the insufficient number of authorized shares to settle outstanding contracts using Black-Scholes with the
following assumptions:
Expected volatility is based primarily on historical
volatility. Historical volatility was computed using weekly pricing observations for recent periods. We believe this method produces
an estimate that is representative of our expectations of future volatility over the expected term of these warrants and embedded
conversion features.
We currently have no reason to believe that
future volatility over the expected remaining life of these warrants and embedded conversion features is likely to differ materially
from historical volatility. The expected life is based on the remaining term of the warrants and embedded conversion features.
The risk-free interest rate is based on U.S. Treasury securities consistent with the remaining term of the warrants and embedded
conversion features.
During the year ended December 31, 2015 and
2014, the Company issued an aggregate of $327,500 and $409,594, respectively in principal of convertible notes payable (includes
reassignments of debt) at interest rates between 8% and 12% (See Note 6). Such convertible notes contained embedded conversion
features in the Company’s own stock and have resulted in an initial derivative liability value of $1,687,000 and $839,000
for the year ended December 31, 2015 and 2014, respectively, which consisted of $623,000 and $225,000, respectively of loss on
debt extinguishment, $263,000 and $0, respectively related to the fair value of preferred stock, $0 and $289,000, respectively
of settlement of outstanding contracts due to insufficient number of authorized shares, $217,500 and $261,750, respectively of
debt discount and $583,500 and $63,250, respectively of excess interest expense.
During years ended December 31, 2015 and 2014,
the Company recorded gain (loss) of $987,000 and ($227,000) related to the change in fair value of the warrants and embedded conversion
features which is included in change in fair value of derivative liabilities in the accompanying consolidated statements of operations.
The following table presents our warrants and
embedded conversion features which have no observable market data and are derived using Black-Scholes measured at fair value on
a recurring basis, using Level 3 inputs, as of December 31, 2015 and 2014:
|
|
|
For the Year Ended
December 31,
2015
|
|
|
For the Year Ended
December 31,
2014
|
|
|
Annual dividend yield
|
|
|
0-8
|
%
|
|
|
0
|
%
|
|
Expected life (years)
|
|
|
0.01 – 3.30
|
|
|
|
0.01 – 4.55
|
|
|
Risk-free interest rate
|
|
|
0.16% – 1.31
|
%
|
|
|
0.11% – 1.79
|
%
|
|
Expected volatility
|
|
|
365.83%-631.31
|
%
|
|
|
77.92%-361.69
|
%
|
The level 3 carrying value as of December 31,
2015 and 2014:
|
|
|
December
31,
2015
|
|
|
December
31,
2014
|
|
|
Embedded Conversion Features
|
|
$
|
1,191,000
|
|
|
$
|
992,000
|
|
|
Warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
|
$
|
1,191,000
|
|
|
$
|
992,000
|
|
|
Change in fair value
|
|
$
|
(987,000
|
)
|
|
$
|
227,000
|
)
|
The following table presents the changes in
fair value of our warrants and embedded conversion features measured at fair value on a recurring basis for year ended December
31, 2015 and 2014:
|
Balance as of January 1, 2014
|
|
$
|
-
|
|
|
Issuance of warrants and embedded conversion features
|
|
|
839,000
|
|
|
Extinguishment of derivatives
|
|
|
(74,000
|
)
|
|
Change in fair value
|
|
|
227,000
|
|
|
Balance as of December 31, 2014
|
|
|
992,000
|
|
|
Issuance of warrants and embedded conversion features
|
|
|
1,687,000
|
|
|
Extinguishment of derivatives
|
|
|
(501,000
|
)
|
|
Change in fair value
|
|
|
(987,000
|
)
|
|
Balance as of December 31, 2015
|
|
$
|
1,191,000
|
|
NOTE 8 - STOCKHOLDERS’ EQUITY
Preferred Stock
On March 9, 2012 and amended on September 10,
2012, the Company designated and determined the rights and preferences of 5,000,000 shares of Series A preferred stock (“Series
A”) with a par value of $0.0001. The Company is authorized to issue 5,000,000 shares of Series A. The holders of Series A
are entitled to receive dividends in preference to dividends on common stock and are entitled to vote together with the holders
of common stock with a voting right equivalent to 50 votes of common stock for each share of Series A held. In the event of liquidation,
the holders of Series A shall be issued one share of common stock for every 50 shares of Series A.
On June 19, 2012, the Company issued 85,000
shares of Series A in connection with a consulting agreement entered into with a director. The value of the shares was $255,000
(based on the fair value of the Series A on the measurement date) and was recorded as prepaid consulting to be amortized over the
service period of twelve months in accordance with the terms of the contract. On October 31, 2012, the Company modified the terms
of the consulting agreement to extend the service period for an additional four years or a total of fifty-five months. During the
years ended December 31, 2015 and 2014, the Company amortized $29,219 in general and administrative expense in the accompanying
consolidated statements of operations.
On April 2, 2012, the Company designated and
determined the rights and preferences of 2,000,000 shares of Series B preferred stock (“Series B”) with a par value
of $0.0001. The Company is authorized to issue 2,000,000 shares of Series B. The holders of Series B are entitled to receive dividends
in preference to any dividends on common stock and are entitled to vote together with the holders of common stock with a voting
right equivalent to 300 votes of common stock for each share of Series B held. In the event that two or more shareholders who combined
own more than 20% of the outstanding common stock enter into an agreement for the purpose of acquiring, holding, voting or disposing
of any voting securities of the Company, then the holders of Series B, as a class, shall be issued three shares of common stock
for every share of common stock outstanding. In the event of liquidation, the holders of Series B shall be issued one share of
common stock for every 300 shares of Series B.
On January 27, 2015, the Company issued the
former CEO 4,000,000 shares of Series A Preferred Stock of the Company as settlement for $40,000 of accrued wages, which were valued
based on the market price of the equivalent number of common shares on the date of issuance of $0.0026 per share, which resulted
in a gain on settlement of accrued wages of $39,792, which was recorded as contributed capital in the accompanying consolidated
statement of stockholders’ deficit for the year ended December 31, 2015.
On February 6, 2015, the Company issued a consultant
250,000 shares of Series A Preferred Stock of the Company for service provided. The shares were valued based on the market price
of the equivalent number of common shares on date of issuance of $0.0045 per share or $1,125.
On May 11, 2015, the Board of Directors of
the Company approved the creation of Series C, D, E and F shares of Preferred Stock.
The Company is authorized to issue 5,300 shares
of Series C Preferred Stock (“Series C”) par value of $0.0001 per share. The Series C will, with respect to dividends
and liquidation, winding up or dissolution, rank: (a) senior with respect to dividends and pari passu in right of liquidation with
the common stock, par value $0.0001 per share; (b) junior to the Series A and B Preferred Stock; (c) senior to any future designation
of preferred stock; (d) junior to all existing and future indebtedness of the Company. Commencing on date of issuance, holders
of Series C will be entitled to receive dividends on each outstanding share of Series C, which will accrue in shares of Series
C at a rate equal to 8% per annum from the issuance date. The Conversion price of the Series C shall mean the lower of (i) $0.004
per share of common stock, or (ii) 70% of the lowest VWAP in the 10 trading days prior to the date of the conversion notice. The
Series C PS may be converted at any time after the earlier to occur of the (i) six-month anniversary of the issuance date or (ii)
an effective registration statement covering the shares of common stock to be issued pursuant to the conversion notice.
On May 11, 2015, the Company issued a consultant
an aggregate of 300 shares of Series C of the Company for service provided. Due to the embedded conversion feature of the Series
C, the Company computed the estimated fair value of the derivative instrument and recorded the initial fair value of $28,000 as
a derivative liability on date of issuance (see Note 7). The value of the Series C, E, F shares is included in derivative liabilities
in the accompanying balance sheet.
The Company is authorized to issue 4 shares
of Series D Preferred Stock (“Series D”) par value of $0.00001 per share. If at least one share of Series D Preferred
Stock is issued and outstanding, then the total aggregate issued shares of Series D Preferred Stock at any given time, regardless
of their number, shall have voting rights equal to four times the sum of: (i) the total number of shares of Common Stock which
are issued and outstanding at the time of voting, plus (ii) the total number of shares of Series A, Series, B, Series C, Series
E, and Series F Preferred Stock which are issued and outstanding at the time of voting divided by (iii) the number of shares of
Series D Preferred Stock issued and outstanding at the time of voting.
On May 11, 2015, the Company issued 4 shares
of Series D as settlement for $73,167 of accrued wages to Brian Altounian, the Company’s former Chief Executive Officer and
Chairman and a beneficial shareholder. No solicitation was made in connection with these transactions and no underwriting discounts
were made or given. The Company believes that the issuance of the Series D was a transaction not involving a public offering and
was exempt from registration with the Securities and Exchange Commission pursuant to Rule 4(2) of the Securities Act of 1933. Mr.
Altounian effectively controls the Company by virtue of the voting rights associated with the Series D Preferred Stock. The valuation
of the 4 shares of Series D was $73,167 and was obtained from a valuation specialist, which applied a control premium percentage
to the market capitalization value of the Company on the valuation date.
The Company is authorized to issue 10,000,000
shares of Series E Preferred Stock (“Series E”) par value of $0.00001 per share. The holders of Series E are entitled
to receive dividends in preference to dividends on common stock. Each share of Series E shall be convertible at par value $0.00001
per share (the “Series E Preferred”), at any time, and/or from time to time, into the number of shares of the Company’s
common stock, par value $0.00001 per share equal to the fixed price of the Series E of $2.50 per share, divided by the par value
of the Series E, subject to adjustment as may be determined by the Board of Directors from time to time (the “Conversion
Rate”). Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, before any distribution
or payment shall be made to the holders of any stock ranking junior to the Series E, the holders of the Series E shall be entitled
to be paid out of the assets of the Company an amount equal to $1.00 per share or, in the event of an aggregate subscription by
a single subscriber for Series E in excess of $100,000, $0.997 per share (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to such shares) (the “Preference Value”), plus all declared but unpaid
dividends, for each share of Series E held by them. After the payment of the full applicable Preference Value of each share of
the Series E as set forth herein, the remaining assets of the Company legally available for distribution, if any, shall be distributed
ratably to the holders of the Company’s Common Stock. Each share of Series E shall have ten votes for any election or other
vote placed before the shareholders of the Company. Shares of Series E are anti-dilutive to reverse splits. The conversion rate
of shares of Series E, however, would increase proportionately in the case of forward splits, and may not be diluted by a reverse
split following a forward split. The value of the Series C, E, F shares is included in derivative liabilities in the accompanying
balance sheet.
On May 11, 2015, the Company issued a consultant
40,000 shares of Series E of the Company for service provided. Each share of Series E preferred stock can be converted into approximately
6.4
shares of common stock. Due to the embedded conversion feature of the Series E,
the Company computed the estimated fair value of the derivative instrument and recorded the initial fair value of $88,000 as a
derivative liability on date of issuance (see Note 7).
The Company is authorized to issue 10,000,000
shares of Series F Preferred Stock (“Series F”) par value of $0.00001 per share. The holders of Series F are entitled
to receive dividends in preference to dividends on common stock. Each share of Series F shall be convertible, at any time, and/or
from time to time, into 500 shares of the Company’s common stock, par value $0.00001 per share (the “Common Stock”).
Such conversion shall be deemed to be effective on the business day (the “Conversion Date”) following the receipt by
the Corporation of written notice from the holder of the Series C Preferred Stock of the holder’s intention to convert the
shares of Series C Stock, together with the holder’s stock certificate or certificates evidencing the Series C Preferred
Stock to be converted. Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, before
any distribution or payment shall be made to the holders of any stock ranking junior to the Series F, the holders of the Series
F shall be entitled to be paid out of the assets of the Company an amount equal to $1.00 per share or, in the event of an aggregate
subscription by a single subscriber for Series F in excess of $100,000, $0.997 per share (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to such shares) (the “Preference Value”), plus all
declared but unpaid dividends, for each share of Series F held by them. After the payment of the full applicable Preference Value
of each share of the Series F as set forth herein, the remaining assets of the Company legally available for distribution, if any,
shall be distributed ratably to the holders of the Company’s Common Stock. Each share of Series F shall have one vote for
any election or other vote placed before the shareholders of the Company. Shares of Series F are anti-dilutive to reverse splits.
The conversion rate of shares of Series F, however, would increase proportionately in the case of forward splits, and may not be
diluted by a reverse split following a forward split.
On June 29, 2015, the Company issued 1,600
shares of Series F of the Company for cash proceeds of $4,000. Due to the embedded conversion feature of the Series F, the Company
computed the estimated fair value of the derivative instrument and recorded the initial fair value of $103,000 as a derivative
liability on date of issuance (see Note 7). The value of the Series C, E, F shares is included in derivative liabilities in the
accompanying balance sheet.
In July, 2015, the Company issued two individuals
an aggregate of 8,000 shares of Series F of the Company for cash proceeds of $20,000. Due to the embedded conversion feature of
the Series F, the Company computed the estimated fair value of the derivative instrument and recorded the initial fair value of
$44,000 as a derivative liability on date of issuance (see Note 7). The value of the Series C, E, F shares is included in derivative
liabilities in the accompanying balance sheet.
Common Stock
On March 20, 2015 the Board of Directors of
the Company unanimously adopted resolutions approving an increase in the number of authorized shares of our common stock, par value
$0.0001 per share, to a total of 4,000,000,000 authorized shares.
On May 18, 2015, the Board of Directors of the Company amended its
Certificate of Formation to:
|
|
·
|
increase the authorized common stock from four billion to five billion;
|
|
|
·
|
adjust the par value of the common stock to $0.00001; and
|
|
|
·
|
set the par value of additional designations of preferred stock to $0.00001.
|
On August 20, 2015, the Board of Directors
of the Company amended its Certificate of Foundation to increase the authorized common stock from 5 billion to 20 billion shares.
On June 19, 2012, the Company issued an aggregate
of 385 shares of common stock at $3,900.00 per share in connection with a consulting agreement entered into with a director. The
value of the shares was $1,500,000 (based on the fair value of the common stock on the measurement date) and was recorded as prepaid
consulting to be amortized over the service period of twelve months in accordance with the terms of the contract. On October 31,
2012, the Company modified the terms of the consulting agreement to extend the service period for an additional four years or a
total of fifty-five months. During the years ended December 31, 2015 and 2014, the Company amortized $128,906 and $171,875, respectively,
in general and administrative expense in the accompanying consolidated statements of operations.
On January 31, 2013, the Company entered into
an agreement with a consultant to provide certain services, including financial management and strategy, establishing strategic
partnerships, sales and marketing, business development services, and ongoing strategic business consulting as requested by the
Company for a period of one year. In exchange, the Company issued the consultant 246 shares of common stock. The value of the shares
was $640,000, which was computed based on 246 shares at $2,600 per share price. In accordance with relevant accounting guidance,
the value of the non-forfeitable shares of common stock was recorded as prepaid consulting to be amortized over the service period
of twelve months. The Company amortized $0 and $53,333, respectively, in general and administrative expenses in the accompanying
consolidated statements of operations for the years ended December 31, 2015 and 2014.
On February 15, 2013, the Company entered into
an agreement with a consultant to provide strategic planning services, business development introductions, and other consulting
services to the Company for a period of one year. In exchange, the Company issued the consultant 769 shares of common stock. The
value of the shares was $2,000,000, which was computed based on 769 shares at a $2,600.00 per share price. In accordance with relevant
accounting guidance, the value of the non-forfeitable shares of common stock was recorded as prepaid consulting to be amortized
over the service period of twelve months. The Company amortized $0 and $250,000, respectively, in general and administrative expenses
in the accompanying consolidated statement of operations for the years ended December 31, 2015 and 2014.
In May 2013, the Company entered into an agreement
with a consultant to provide and arrange investor meetings to communicate key Company fundamentals, technical aspects and operations
to potential retail investors and financial advisors, registered representatives and money managers. In exchange, the Company agreed
to pay consultant a monthly fee of $8,500 and issue the consultant 38 shares of common stock. Both parties agreed that the consulting
services would begin after the Company’s stock is available to retail investors. During June 2014, the Company issued the
consultant the 38 shares of common stock with a value of $45,000 based on the current market price and capitalized this amount
as part of prepaid consulting and other assets. The Company amortized $19,418 and $25,582 to general and administrative expenses
in the accompanying consolidated statement of operations for the year ended December 31, 2015 and 2014.
In June 2014, the Company entered into an agreement
with a consultant to provide business development and strategic business advisory services. In exchange, the Company agreed to
pay consultant a monthly fee of $7,500 and issue the consultant 13 shares of common stock. During June 2014, the Company issued
the consultant the 13 shares of common stock (see note 8) with a value of $14,964 based on the current market price and capitalized
this amount as part of prepaid consulting and other assets. The Company amortized $6,662 and $8,302 to general and administrative
expenses in the accompanying consolidated statement of operations for the year ended December 31, 2015 and 2014.
In October 2014, the Company entered into an
agreement with a consultant to provide business development and strategic business advisory services. In exchange, the Company
agreed to issue the consultant an aggregate of 6,154 shares of common stock. The shares are to be issued on October 6, 2014, January
1, 2015, April 1, 2015 and July 1, 2015 of 1,538 shares each. The initial 1,538 shares of common stock (see note 8) with a value
of $180,000 based on the current market price $117.04 per share was capitalized as part of prepaid consulting and other assets.
The Company amortized $84,000 and $96,000 to general and administrative expenses in the accompanying consolidated statement of
operations for the year ended December 31, 2015 and 2014.
In January 2014, holders of certain convertible
notes payable converted $220,000 in principal and $35,931 of accrued and unpaid interest into 984 shares of the Company’s
common stock (See Note 6).
In March 2014, the Company issued 19 shares
of common stock, at a price of $1,315.79 per share, for cash proceeds of $25,000 to a third party investor. Subsequently, in April
2014, the Company issued an additional 19 shares of common stock, at a price of $1,315.79 per share, for additional cash proceeds
of $25,000 to the same third party investor.
In April 2014, the holder of certain convertible
notes payable converted $200,000 in principal and $41,943 of accrued and unpaid interest into 1,390 shares of the Company’s
common stock (See Note 6). Subsequently, in August 2014, the note holder reversed his decision and chose to receive his accrued
and unpaid interest in cash. As a result, the Company issued the note holder a note payable for approximately $42,000 and cancelled
the 236 common shares previously issued (See Note 6).
In June 2014, the holder of certain notes payable
converted $212,000 in principal and $19,539 of accrued and unpaid interest into 356 shares of the Company’s common stock
(See Note 6). Based on the fair value of the common stock on the measurement date, the Company recorded an additional $185,231
of interest expense due to the fair value of the shares being in excess of the amount of debt converted.
In July 2014, the Company issued 58 shares
of common stock, at a price of $517.24 per share for cash proceeds of $30,000 to a third party investor.
In July and September 2014, the Company issued
a total of 508 shares of common stock to employees as compensation for continuing to support the Company’s efforts. The Company
recorded $72,500 of compensation expense based on the fair value of the shares on the measurement date in the consolidated statement
of operations for the year ended December 31, 2014.
In August 2014, the holder of certain notes
payable converted $21,668 in principal and $3,666 in accrued interest into 195 shares of the Company’s common stock (see
Note 6). Based on the fair value of the common stock on the measurement date, the Company recorded an additional $63,335 of interest
expense due to the fair value of the shares being in excess of the amount of debt converted.
In August 2014, the Company settled $343,936
in accrued expenses owed to its Chief Executive Officer by issuing him 1,000,000 shares of the Company’s common stock based
on the fair value of the shares on the measurement date.
During October 2014, the Company issued an
aggregate of 673 shares of its common stock, at a price of $52.01 per share for cash proceeds of $35,000 to two different third
party investors.
During October 2014, the Company issued 1,538
shares of its common stock to an individual to extend the due dates of an aggregate of $600,000 in notes payable to January 2015
and March 2015 (see Note 6).
During October 2014, the Company issued and
aggregate of 462 shares of its common stock to a third party investor in connection with the default provision associated with
the note agreement. The Company recorded the aggregate amount of $238,000 as interest expense in the accompanying consolidated
statement of operations (see Note 6).
During October, November and December 2014,
the holders of certain notes payable converted $53,494 in principal and accrued and unpaid interest into 4,760 shares of the Company’s
common stock (See Note 6).
During the year ended December 31, 2014, the
Company issued an aggregate of 1,941 shares of its common stock to various individuals for consulting and other services rendered
and for the conversion of various amounts due approximating to $677,000.
During year ended December 31, 2015, various
holders of convertible note payable converted $257,691 in principal and $7,320 of accrued and unpaid interest into 484,634,780
shares of the Company’s common stock (see Note 6).
During the year ended December 31, 2015, the
Company issued an aggregate of 3,545 shares of its common stock to various individuals for consulting and other services rendered
in the aggregate amount of $31,500.
Reverse Stock Splits
In January 2014, the Company effected a one-for-ten
reverse stock split of the Company’s outstanding shares of common stock (effective January 21, 2014) and of the Company’s
outstanding shares of Series A Preferred Stock (effective January 22, 2014). The accompanying consolidated financial statements
have been updated to reflect the effect of these reverse stock splits.
On June 3, 2015, the board of directors of
the Company approved a 1,300 to 1 reverse stock split of shares of common stock. The reverse stock split was approved by the Financial
Industry Regulatory Authority on July 7, 2015. All fractional shares were rounded up, shares of common stock and per share
data issued prior to July 2015, have been retroactively restated to reflect the impact of the reverse stock split for all
periods presented.
Warrants
The following represents a summary of all common
stock warrant activity:
|
|
|
Outstanding Common Stock Warrants
|
|
|
|
|
Number of
Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
938
|
|
|
$
|
208
|
|
|
$
|
2,250,002
|
|
|
Grants
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
|
|
(118
|
)
|
|
|
195
|
|
|
|
|
|
|
Cancelled/Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014
|
|
|
821
|
|
|
$
|
208
|
|
|
$
|
163,297
|
|
|
Grants
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Cancelled/Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2015 (2)
|
|
|
821
|
|
|
$
|
208
|
|
|
$
|
-
|
|
|
|
(1)
|
Represents the difference between the exercise price and the estimated fair value of the Company’s common stock at the end of the reporting period.
|
|
|
|
|
|
|
(2)
|
The common stock warrants outstanding and exercisable as of December 31, 2015 and 2014 have a weighted-average contractual remaining life of 2.9 years and 3.9 years, respectively.
|
In January 2014, the Company issued a Secured
Promissory Note to an individual in the amount of $300,000 (See Note 6). In connection with this note, the Company issued a warrant
to purchase 25,000 shares of the Company’s Series A Preferred Stock at a price of $1.50 per share with an expiration date
of January 2017. As of December 31, 2015 and 2014, all of these preferred stock warrants are outstanding.
In February 2014, the Company entered into
a waiver and amendment #2 to a secured note (See Note 6), at which time the note holder used $22,922 in accrued and unpaid interest
on the secured note to exercise warrants to purchase 118 shares of the Company’s common stock.
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company was party to a management fee agreement
with Alliance Acquisition Corp. (“Alliance”). At December 31, 2015, Brian Altounian (“Altounian”), former
CEO, owned approximately 34% of Alliance. Alliance provided the Company with general business support services, including, but
not limited to, the following: providing executive and administrative level support, general office support, investor relations
assistance, human resource assistance, financial and accounting assistance, legal support, office equipment and office space. From
time to time Alliance would advance the Company capital and pay expenses on behalf of the Company. Additionally, from time to time,
the Company would advance Alliance capital and pay expenses on behalf of Alliance. The monthly fee was $5,000 for the period from
November 2011 through June 2013. Based on the decline in business and required support by the Company, the management fee was terminated
effective July 1, 2013.
The following table summarizes the activity
between the Company and Alliance:
|
Management fee payable – December 31, 2013
|
|
$
|
30,330
|
|
|
Management fee
|
|
|
—
|
|
|
Advances to/payments on behalf of the Company
|
|
|
—
|
|
|
Payments to/on behalf of Alliance
|
|
|
(29,653
|
)
|
|
|
|
|
|
|
|
Management fee payable - December 31, 2014
|
|
$
|
677
|
|
|
Management fee
|
|
|
—
|
|
|
Advances to/payments on behalf of the Company
|
|
|
—
|
|
|
Payments to/on behalf of Alliance
|
|
|
—
|
|
|
|
|
|
|
|
|
Management fee payable - December 31, 2015
|
|
$
|
677
|
|
Alliance and Altounian have ownership interests
in Akyumen Technologies, Corp. (“Akyumen”). At December 31, 2015 and December 31, 2014, Alliance and Altounian owned
less than 1% of Akyumen individually and collectively. During the year ended December 31, 2015, Akyumen provided certain software
development and technology related services to the Company for $250,000. Such costs were expensed to general and administrative
expense in the accompanying consolidated statement of operations. In addition, Akyumen engaged the Company for an advertising campaign
on the Company’s websites. The advertising campaign was for $150,000 for the period April 1, 2014 through June 30, 2015.
The Company recorded $25,000 and $150,000 in advertising revenue for the years ended December 31, 2015 and 2014, respectively in
the accompanying consolidated statements of operations.
During the year ended December 31, 2015, the
Company received $100,000 from Akyumen as an advance on a potential future investment into the Company. Such amounts are due on
demand and are non-interest bearing, if the potential investment is not consummated. During the period from January 1, 2016 through
April 13, 2016, Akyumen advanced on additional $514,000.
On January 27, 2015, the Company issued the
former CEO 4,000,000 shares of Series A Preferred Stock of the Company as settlement for $40,000 of accrued wages, which were valued
based on the market price of the equivalent number of common shares on the date of issuance of $0.0026 per share, which resulted
in a gain on settlement of accrued wages of $39,792, which was recorded as contributed capital in the accompanying consolidated
statement of stockholders’ deficit for the year ended December 31, 2015.
On May 11, 2015, the Company issued 4 shares
of Series D as settlement for $73,167 of accrued wages to Former CEO (see Note 8).
In June 2014, the Company entered into an agreement
with a Mr. Robert Estareja to provide business development and strategic business advisory services. In exchange, the Company agreed
to pay Mr. Robert Estareja a monthly fee of $7,500 and issue the consultant 13 shares of common stock. During June 2014, the Company
issued the Mr. Robert Estareja the 13 shares of common stock (see note 8) with a value of $14,964 based on the current market price
and capitalized this amount as part of prepaid consulting and other assets. The Company amortized $6,662 and $8,302 to general
and administrative expenses in the accompanying consolidated statements of operations for the years ended December 31, 2015 and
2014, respectively.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Royalties
In connection with certain of the Company’s
acquisitions, the Company has entered into various royalty agreements (see Note 5). Royalty payments related to acquisitions range
from 10% to 100% of related revenue, as summarized below:
|
|
·
|
Wowio, LLC - 20% of related revenue until all purchase price consideration has been satisfied, then 10% of related revenue through perpetuity.
|
|
|
|
|
|
|
·
|
Duck - 10% of related revenue until all purchase price consideration has been satisfied, with no subsequent royalty amounts due.
|
|
|
·
|
SDE - 100% of related revenue until all purchase price consideration has been satisfied, with no subsequent royalty amounts due.
|
Additionally, the Company enters into royalty
agreements with the authors of the eBooks included on its websites, which call for royalty payments based on various percentages
of revenues earned, less processing fees and in the case of Sponsored Downloads, a fixed price per download.
Employment Agreements
On September 15, 2015, the Company entered
into an employment agreement with Mr. Robert Estareja as Chief Executive Officer, which expires in September 2017, with an automatic
renewal period of two years unless otherwise terminated. The employment agreement requires annual base salary payments of $300,000
per year. In addition, the executive is entitled to bonuses in amounts based on various factors, including but not limited to the
Company’s financial performance, amount of financing received and producer fee credits. Pursuant to the agreement, if the
executive is terminated without cause, he is entitled to receive an amount equal to six months of his annual base salary.
On September 15, 2015, the Company entered
into an employment agreement with Mr. Brian Altounian as Executive, which expires in September 2017, with an automatic renewal
period of two years unless otherwise terminated. Mr. Altounian will serve as the chairman of the Board of Directors of the Company
and provide advisory services to the CEO. The employment agreement requires annual base salary payments of $180,000 per year. In
addition, the executive is entitled to bonuses solely at the discretion of the Board of Directors. Pursuant to the agreement, if
the executive is terminated without cause, he is entitled to receive an amount equal to six months of his annual base salary.
Indemnities and Guarantees
During the normal course of business, the Company
has made certain indemnities and guarantees under which the Company may be required to make payments in relation to certain transactions.
These indemnities include certain agreements with its officers under which the Company may be required to indemnify such person
for liabilities arising out of their employment relationship. In connection with the Company’s acquisitions, the parties
have agreed to indemnify each other from claims relating to the acquisition agreements. In connection with the Company’s
publisher agreements, the parties have agreed to indemnify each other from certain claims relating to the agreements. The duration
of these indemnities and guarantees varies, and in certain cases, is indefinite. The majority of these indemnities and guarantees
do not provide for any limitation of the maximum potential future payments we may be obligated to make. Historically, the Company
has not been obligated to make significant payments for these obligations and no liability has been recorded for these indemnities
and guarantees in the accompanying consolidated balance sheets.
Legal
In October 2013, a former employee filed a
complaint against the Company and its CEO, seeking past due wages of $57,096, damages and attorney’s fees. The Company has
accrued the amount of past due wages in its consolidated financial statements. A judgment was entered into on March 18, 2016 for
an amount of $162,475, which includes interest of $14,005. The Company accrued the remaining amount of $91,374 and related interest
of $8,529 in accounts payable and accrued expenses as of December 31, 2015.
On
March 18, 2016, CBK Consultants, Inc. (“CBK”) filed a Notice of Motion for Summary Judgment in Lieu of Compliant against
us (CBK Consultants, Inc. a/k/a CBK, Inc. v. Wowio, Inc., Supreme Court of the State of New York, County of Nassau), seeking the
repayment of $450,000 of principal from a promissory note we given CBK along with $20,000 of interest along with costs and attorney
fees. The Company has accrued such costs and they are included in notes payable and accrued expenses.
In the normal course of business, the Company
may become involved in various legal proceedings. The Company knows of no pending or threatened legal proceeding to which the Company
is or will be a party that, if successful, might result in material adverse change in the Company’s business, properties
or financial condition.
NOTE 11 - INCOME
TAXES
The Company is subject
to taxation in the United States and California. The Company does not have any income tax provision for the years ended December
31, 2015 and 2014 due to current and historical losses.
The provision for
income taxes using the statutory federal income tax rate of 34% as compared to the Company’s effective tax rate is summarized
as follows:
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Federal tax benefit at statutory rate
|
|
$
|
(560,000
|
)
|
|
$
|
(1,301,000
|
)
|
|
State tax benefit, net
|
|
|
-
|
|
|
|
-
|
|
|
Common stock issued for services
|
|
|
11,000
|
|
|
|
25,000
|
|
|
Loss on extinguishment of debt
|
|
|
212,000
|
|
|
|
134,000
|
|
|
Other differences
|
|
|
1,000
|
|
|
|
4,000
|
|
|
Change in valuation allowance
|
|
|
336,000
|
|
|
|
1,138,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
At December 31, 2015
and 2014, the Company had a net deferred tax asset of approximately $9,306,816 and $8,973,000, respectively. Due to uncertainties
surrounding the Company’s ability to generate future taxable income to realize these assets, a full valuation allowance has
been established to offset the net deferred tax asset. Additionally, the future utilization of the Company’s net operating
loss to offset future taxable income may be subject to an annual limitation, pursuant to Internal Revenue Code Section 382, as
a result of ownership changes that may have occurred previously or that could occur in the future. The Company has not performed
a Section 382 analysis to determine the limitation of the net operating loss and research and development credit carry forwards.
Significant components
of the Company’s deferred tax assets are as follows:
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Federal and state net operating loss carryforwards
|
|
$
|
8,224,000
|
|
|
$
|
7,584,000
|
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
California franchise tax
|
|
|
(82,000
|
)
|
|
|
(105,000
|
)
|
|
Differences in tax basis
|
|
|
856,000
|
|
|
|
1,285,000
|
|
|
Accrued expenses and other
|
|
|
309,000
|
|
|
|
209,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
9,307,0000
|
|
|
|
8,973,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(9,307,000
|
)
|
|
|
(8,973,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Realization of the
deferred tax assets is dependent upon the generation of future taxable income, the amount and timing of which are uncertain. Accordingly,
the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by approximately
$336,000 and $1,434,000 in 2015 and 2014, respectively.
As of December 31,
2015, the Company has net operating loss carry forwards to offset future federal taxable income of approximately $18,819,000 and
state taxable income of approximately $20,644,000, which begin to expire in 2029.
NOTE 12 – WITHHELD PAYROLL TAXES
Since its inception, the Company made several
payments to employees for wages that were net of state and federal income taxes. Due to cash constraints, the Company has not yet
remitted all of these withheld amounts to the appropriate government agency. Accordingly, the Company has recorded $358,477 and
$345,214, related to this obligation in accrued compensation and related costs in the accompanying consolidated balance sheets
as of December 31, 2015 and 2014, respectively, including estimated penalties and interest.
NOTE 13 - SUBSEQUENT EVENTS
The Company has evaluated subsequent events
after the consolidated balance sheet date and based upon its evaluation, management has determined that no subsequent events have
occurred that would require recognition in the accompanying consolidated financial statements or disclosure in the notes thereto
other than as disclosed in the accompanying notes.
On July 24, 2015, the Company issued to certain
officers and directors of the Company, an aggregate of 1,000,000,000 restricted shares of common stock. The shares were issued
for settlement of accrued wages of an aggregate of $20,000 in outstanding obligations held on the books and records of the Company.
The Company has the right, but not the obligation, to repurchase 100% of the shares prior to July 31, 2016, and 50% of the shares
from August 31, 2016 until July 31, 2017 at the conversion price of $0.00002 per share. On January 15, 2016, the Company determined
that such transaction was documented based on post-split shares and a pre-split common stock valuation, which was not the intent
of the Company. Accordingly, such transaction has been rescinded and reissued. The shares have been excluded from the number of
shares outstanding for all period presented. No solicitation was made and no underwriting discounts were given or paid in connection
with this transaction. The Company believes that the issuance of shares pursuant to the agreement are exempt from registration
with the Securities and Exchange Commission pursuant to Section 4(2) of the Securities Act of 1933.
In January 2016, the Company paid off various
notes payable in the total principal amount of $300,000, and a convertible note in principal amount of $2,500.
In January, March and April 2016, various convertible
note holders converted total of $8,506 in principal into 201,610,167 shares of common stock.